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Tuesday, September 22, 2015

Is The Story of Emergency Funds Overrated?

I recently read an article online about a person who has invested all his funds into the stock market. From his past articles, it appears that he doesn't keep any funds for emergency purpose and I get the impression that neither does he think he requires them at this moment. He is young, single and probably doesn't have any strong commitment to anything other than himself. There were a couple of people who have attacked him with his choice and action being naïve, but I think the overly strong reaction appears pretty strange to me given that these people does not know anything about his background.

We have all by now heard the mantra advice that it is advisable to keep 12 months of expenses in your emergency funds in case unexpected things cropped up. There are further discussion about whether it is preferred to keep 3, 6 or 12 months of either expenses or income and the discussion can go on and on. The truth is, these choices are down to each individual preference, objective and circumstances and decisions should be made independent without subject to any comparison made to another individual.

Let me give an example that illustrate my own case.

Many people would have considered the fear of retrenchment from their job as a subset of factor for consideration when thinking about emergency situation. This will vary differently from one individual to another, depending on the industry or role one is working at. Maybe you are currently working in a cyclical industry, where the likelihood of your company being affected by the economic cycle is pretty high. On the other hand, you can be working for a government sector where the likelihood of a retrenchment is pretty low.

For my own case, I consider the probability of this particular factor when deciding on my emergency funds pretty low due to my role that I am engaged in. I won't entirely rule out the possibility but the chances are slim. For instance, my role in the company entails preparing for the budget for the company. When the company exercises its discretion for retrenchment, they are usually projected at least a year in advance and I would be leading the project for this from the finance representative. What this means is that I would have known in advance and be better prepared than the others should I am one of those included in the lists and I can start preparing for it sooner than many other people that were informed at a later stage.

My purpose of illustrating this is simply to highlight the difference in individual's circumstances in life and there could be many factors to consider at before one start to think that the 12 months of expenses are the holy grail of emergency funds before you can start doing anything else.

We can extend the discussion into how well you are covered for a H&S insurance, how easy you are able to access any liquid funds, how many credit cards you might have, or how many rich godparents you have adopted. Recently in the blogosphere, there has been a rather hotly debated topic about young employee transferring their money over from CPF OA to SA in order to obtain higher returns in the long run. Monkey see monkey do. The point being that every individual is different and I don't think there is a hard and holy grail rule that needs to be followed simply because everyone else is doing the same.

Final Thoughts

My very own definition of emergency funds are funds that should come unexpected and is something that I am not able to control. In this case, I have excluded the possibility of retrenchment because this is something my role allows me to have a higher degree of visibility in advance than many others. I can't say the same for things related to permanent disablement which I deemed as unpredictable. The same goes to unexpected illness coming from my family. In any case, my projected emergency funds for myself are estimated at around 8 months of expenses based on my own discretion of what I think emergency should entails.

If you are confused about how much to keep for your emergency funds, there are plenty of advise out there you can seek. The general rule of thumb is within 3 to 12 months of expenses and you can take reference from that, assuming everything else equal.

But more importantly, I think it is even more crucial to consider and look at your own options and truly understand what you might need or do not need (or have) in life in order to advance better. That does not entails you keeping 12 months of expenses in your emergency funds and things will turn out to be fine. It just means that it allows you to react better when unexpected things hit you while your mind is in a blank.

What do you think? Are there any hard rule of thumb to keep as emergency funds? Do people monkey see monkey do for emergency funds as well?

Emergency Fund (EF) can be tricky. Says, right now I have short-term and long term disability insurance with my company. If something happen, I should get 50%-65% of my salary, given my expense is less than 50% of my income, this should cover it. Until my emergency insurance kick in, I also have PTO (paid time off) from work.

Determine the EF base on my living expenses, determine EF base on my rental property expenses, should I even add a baby into the mix if we have a baby? etc. This number could change drastically.

My mindset while working and not working would change, my leverage if I work change At least the bank says that, if you don't hold a full time job, it is super difficult to get a mortgage. Hence, My EF should be a lot higher.

I'd be nervous to use credit card as an option.

If I'm not working my full-time job, my short term and long term disability would go away. This also result me to have a higher EF.

As they says, different strokes for different folks... at different stages of life. :)

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